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After Baidu, Alibaba, and Tencent retreat, who will be the savior of Chinese EV makers?

While first-tier tech giants are retreating, Xiaomi and Meituan Dianping are testing the waters in the new energy vehicle sector via investments.

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China’s new energy vehicle (NEV) makers have never experienced a tougher time than now.

Total sales of NEVs in China, still the world’s largest automobile and NEV market, have plunged 45.6% year-over-year in October, according to the China Association of Automobile Manufacturers. The sales have contracted after the Chinese government announced in June that national subsidies for NEVs will be phased out by the end of 2020, which generated an unprecedented slump in the industry.

The Chinese government’s generous subsidies to NEV producers played a vital role in developing the industry by making vehicles more affordable. According to BloombergChina’s central government delivered over 22 billion in NEV subsidies to companies in 2017 alone, but from June 2019, China reduced its subsidies by over 50% and completely eliminated those for vehicles with ranges under 250 km, Forbes reported. The government said that its intention is to animate EV makers to compete on their own and develop vehicles with better quality and technology, while phase out those uncompetitive companies, according to the Ministry of Finance.

The Chinese government also announced that it will invest more money in NEV infrastructures, such as charging lots for electric cars and hydrogenation facilities for fuel cell vehicles.

However, after the announcement, the country’s auto sales continued its descent—for 16 months in a row—in October, shrinking 4% from the same month last year, following declines of 5.2% in September and 6.9% in August.

In the so-called “cold winter” for NEVs, fundraising activities for EV startups also progressed slower than expected, as many investors, including first-tier behemoths Baidu, Alibaba, and Tencent (BAT) hesitated or stopped pouring cash in this money-burning industry.

Alibaba-backed Xpeng Motors completed its USD 400 million Series C funding in November, with the Hangzhou-based giant company missing from the investors’ list. 36Kr learned from an investor close to Xpeng’s executives that this round was originally planned to be completed by June, but Alibaba’s internal restructuring, and the resignation of Joseph Tsai, who was in charge of Alibaba’s overall investment strategy, have affected the behemoth’s investing tactics towards Xpeng.

A similar situation occurred to electric vehicle (EV) maker Nio, as its strategic backer Tencent began to lose interest in the firm. Nio reported a far bigger-than-expected net loss of USD 478.6 million in the second quarter of 2019, an 83.1% year-on-year increase. A Nio executive told 36Kr that in the two rounds of convertible bond offering after its IPO, the company’s founder and CEO Li Bin had to spend extra time in convincing Tencent to make a subscription.

As mass production of NEVs can only start after burning billions of dollars, while growth for sales remains low amid a contracting market, the three behemoths have started to rethink their investment strategies on NEV startups, according to analysts. 

BAT’s early investment strategies

Back to the time when the smart EV market was considered to have great potential for growth, the three first-tier giant did not want to miss their shots, with each one focusing its attention on one automaker: Tencent placed its bet on Nio, Baidu invested multiple rounds on WM Motors, and Alibaba became the largest stakeholder of Xpeng. However, these giants’ investment strategies differed from each other.

For Tencent, which focalizes on the industrial internet, the quickest method to tap the valuable automotive industry is via investment or partnerships. A director of Tencent’s transportation division told 36Kr in an interview that his company has been making investments in the automotive industry for two purposes: “One is to observe and understand the industry, and the other is to establish a closer collaboration via investment,” he said, adding that Tencent’s move in Nio fell into both categories.

Tencent invested in Nio in several rounds and became its largest corporate shareholder, according to Nio’s 2018 annual report. As for partnerships, Nio’s domestic cloud service is built upon Tencent Cloud, and it has separately established joint ventures with traditional automobile manufacturers GAC Group and Changan Automobile, which are both Tencent’s key partners.

“Nio was like a key to Tencent in the early stage, which opened a door for the giant to understand the NEV industry. However, Tencent currently only sees Nio as one of its investment projects. To garner support from Tencent, the automaker has to demonstrate an impressive performance on its business,” an investor of Nio told 36Kr.

Baidu shares a similar strategy with Tencent over its investment in NEV makers, but with a focus on autonomous driving-related technologies.

A Lixiang investor once told 36Kr that before investing in WM Motors, Baidu had an almost closed deal with Lixiang, but when Baidu asked the NEV maker to share all of its vehicle’s data in exchange for the investment, Lixiang turned down the offer.

Baidu thus turned to WM Motor with multiple rounds of funding. WM Motors and Baidu announced in January their long-term partnerships for level-3 and level-4 autonomous driving solutions. Later in March 2019, Baidu led WM Motors’s RMB 3 billion (USD 425 million) Series C funding.

Compared with Tencent and Baidu, the logic behind Alibaba’s investment in the automotive industry is more complicated. Before investing in Xpeng, Alibaba had already entered the smart vehicle sector. The Hangzhou-based giant formed a joint venture with China North Industries Group in 2015 to develop positioning services, and launched a simulation computing cloud platform with automaker SAIC Motor in the same year. Meanwhile, Alibaba-owned online mapping service AutoNavi has already become a leading product of its kind and successfully entered the race for precision mapping.

Alibaba has a clear purpose for its actions in the automobile industry, which is to provide automakers with infrastructural systems and facilities to boost the manufacturing of vehicles. It is also seeking opportunities for its self-developed operating system AliOS in the automotive sector, and those are some of the reasons behinds its investment in Xpeng, according to industry watchers.

However, an executive in Alibaba’s automobile division once told 36Kr that Banma (Alibaba-backed intelligent in-car software solution provider based on AliOS) will not be likely partner with Xpeng for now, as the automaker’s production volume is still low. The first production model of Xpeng, dubbed G3 SUV, was launched in December 2018 and shipped 10,000 models as of June.

Xiaomi and Meituan follow up

The entire automotive industry has been offering new opportunities to first-tier behemoths to grow in the industrial internet field, as they can get familiar with the manufacturing industry and its upstream and downstream industrial chain via investments.

However, according to an investor of several NEV makers, internet giants are not motivated enough to continue betting big in NEV automakers, as the sector is not competitive enough for them to win the battle for market share.

Instead of the BAT, second-tier tech giants, such as Meituan Dianping, Xiaomi, and ByteDance, are testing the waters by investing in NEV startups. Xiaomi came onboard as a strategic investor in Xpeng’s recent Series C funding, while Meituan’s founder and CEO Wang Xing was the leading investor in the USD 530 million Series C round of Chinese EV maker Lixiang, personally contributing nearly USD 300 million, while ByteDance also poured in USD 30 million.

The strategic investment in Xpeng marks the first time Xiaomi participated in a NEV company fundraising. Prior to this investment, Xiaomi’s CEO Lei Jun, along with his co-founded venture capital firm Shunwei Capital, had already entered the market: Lei Jun was an early investor in Nio, and Shunwei Capital had invested in Nio and Xpeng.

“Lei Jun was hesitating between Nio and Xpeng before this investment, but eventually, he decided to invest in Xpeng as he believed the EV maker will spend the money more wisely,” said an investor familiar with the matter.

Xiaomi’s “smartphone+AIoT” dual-engine strategy announced earlier this year is also a motivation behind its investment into NEV startups.

As its smartphone business loses steam, Xiaomi is placing the bet on the Internet of Things (IoT) with a focus on smart home appliances. It has been adding a series of new items to its appliance portfolio that now spread across 22 categories, ranging from air conditioners, washing machines, TVs and refrigerators.

Based on its development in the smart appliances, Xiaomi has extended its strategy of AIoT to the automotive industry with an aim to build a smart in-vehicle ecosystem, and both WM Motor and Xpeng have become its partners to achieve that goal.

Compared with Xiaomi’s gradually consolidated investment strategy in NEV makers, Meituan’s co-founder and CEO Wang Xing made the investment in Lixiang personally, raising its stake in the firm to close to 10%. 

The logic behind this investment is not that complicated. “Cars are very necessary to Meituan whatever the company plans to deliver in the future,” a key supplier of Lixiang told 36Kr, citing the automaker’s take on Wang’s investment.

Looking into the future

The Chinese government is pumping new hopes into the NEV market by raising the nationwide NEV sales target to 25% in 2025. This includes EVs, cars powered by renewable energy such as hydrogen fuel, as well as electric hybrids, according to a draft proposal by the Ministry of Industry and Information Technology (MIIT).

Last year, NEV sales in China hit 1.25 million units, accounting for a mere 4.5% of total vehicles sold in the country in 2018, according to a report by Evergrande Research Institute. Beijing’s ambition to leapfrog sales to 25% by 2025 brings opportunities and poses challenges for the EV sector at the same time.

The plan also designates that the government will continue to boost technological innovation and breakthroughs in EV batteries and in-car operating systems, and will improve infrastructure development in hydrogen fuel and driverless vehicles.

While the Chinese authorities are trying to set a different but encouraging policy environment to foster NEV makers to grow, these startups still have to find new investments to survive. Many of them have spread their tentacles trying to reach overseas ventures, new government funds, or industry capitals, but they will have to present a solid performance to convince new potential investors, as the industry is experiencing one of its worst recessions. 

The original article was written by Li Qin of 36Kr, KrASIA’s parent company.